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Where do companies that want outside advice look for it?
Executives at younger companies are almost as likely to turn to their peers at other businesses as they are to call on consultants or accountants. In addition to being cheaper, it's a less formal way to get detailed information about how other people do things, notes John Thomas, CEO of Dakota Systems Inc., a $2.1-million fabricator of fluid- and gas-handling systems in Andover, Mass. Besides working with his accountant, Thomas has developed relationships with executives at two businesses similar to his own -- one in Texas and the other in California. He's talked to them about everything from salary levels to profit-sharing options to the frequency of their performance reviews.
But the picture changes as companies get older and more established. Companies founded before 1984, for example, tend to rely more on traditional sources of advice, such as trade associations or consultants.
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What are the main concerns of companies that seek help?
The smaller the company, the more interested it is in benefits. For businesses under $1 million, this ranks far ahead of every other concern. At larger companies, interest shifts to salary ranges -- the eternal question of what to offer new hires and how to keep them once they've settled in.
As for different industries, the issues are spread evenly, with one major exception: retail businesses have a particularly keen interest in how to develop effective incentive plans.
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How do companies decide how much to increase executive salaries?
The most common factor, logically enough, is how the business is doing. That's cited by 59% of the executives we surveyed, and it cuts across all industry and size categories. A somewhat smaller group of respondents (52%) says salary increases are decided at least partly on a discretionary basis; cost of living is far behind, at 12%.
The most interesting finding, however, has to do with the relative importance of individual performance. Among businesses with sales of less than $1 million, individual performance is cited just 27% of the time. But once sales reach $10 million or more, an executive's performance becomes a factor in nearly 60% of the companies.
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What about executive bonuses? How are they determined?
Sixty-five percent of the companies surveyed pay bonuses to executives, but despite all we hear about the trend toward "paying for performance," most businesses are still pretty informal about how they allocate bonuses. In fact, 59% of our respondents say the decision is at least partly discretionary. The process becomes more numbers-driven as companies get larger, but discretion remains substantial even after companies pass the $5-million mark.
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Is it usually the CEO who makes the final decision on executive compensation?
In about 80% of the companies surveyed, CEOs have a big say in the decision. Some companies (12% overall), though, turn the decision over to managerial committees. At Macke Business Products Inc., a $22-million company in Rochester, N.Y., for example, the top four executives set their own salaries and those of the top dozen managers. Doing things this way generates a feeling of trust among managers, CEO Edward H. Fischer says. "If we were more arbitrary, it might undermine the team spirit."
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Is it true that the use of executive stock options is on the rise?
Not according to our survey. In the four years we've been tracking stock options for executives, the levels have remained virtually flat. Incentive stock options, which provide opportunities for employee gains with no corresponding tax benefit to the company, are currently used at about 9% of the companies we survey. Nonqualified options, which do have potential tax benefits for employers, are used at around 3%.
What businesses are most apt to have stock options? Manufacturing companies and businesses with sales of more than $10 million; both groups tend to be a little more aggressive with their capital-accumulation programs. But 65% of the $10-million-plus companies we surveyed had nothing by way of a capital-accumulation plan, and the percentage of smaller businesses without plans was closer to 86%.
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What guidelines do CEOs use to set their own compensation?
Because of the niches they operate in, many entrepreneurs don't think of themselves as being part of well-defined industries. That makes setting pay levels a little tricky, according to David Charles, president of BenchMark Environmental Services Group, a $10-million heating, ventilation, and air-conditioning service contractor based in Denver. With 97 employees and business in four states, BenchMark, Charles says, is set up quite differently from its competitors, which have fewer employees and operate in a smaller area. So, rather than using them as a comparison, he plays off owner-operators of service firms that are in situations more analogous to his own.
Even when industry comparisons are easy to find, some CEOs seem reluctant to give them too much weight. Louis Williams, president of L. C. Williams & Associates, a Chicago public-relations firm, for instance, says he pays himself less than owners of other firms his size. "Not that I don't like money as much as anyone," he says. "But as the owner, I look at things a little longer term. As the business becomes more valuable, I'll benefit."
Overall, the largest number of CEOs in our survey said they based their compensation on profitability. Salaries and bonuses, on average, totaled $104,802. Executives at companies with sales exceeding $5 million were more likely to cite industry norms as a major factor than smaller businesses. And they were less likely to mention capital needs or taxes.
